The international brokerage said the universal bank licence — expected to be effective by mid-2026 — will help AU reduce funding costs by 30–40 basis points, increase fee income, and ease regulatory requirements such as priority sector lending. The transition, it added, will also strengthen AU’s brand, attract better talent, and lower attrition. The brokerage expects 20–25% annual growth in deposits and loans over the next few years.
AU has already delivered strong numbers, with deposits growing at 28% CAGR during FY22–25 and loan growth expected to sustain at 22% CAGR through FY25–28 — the highest among banks covered by Jefferies. The firm sees return on assets improving to 1.7% in FY27 and 1.8% in FY28 as deposit costs ease and the credit cycle normalises.
The brokerage expects profitability to improve from December 2025, with credit costs moderating as stress in the microfinance and credit card portfolios stabilises and mortgage delinquencies remain manageable. With a CET-1 ratio of 18%, AU is well-capitalised for its current growth phase, though Jefferies has factored in a Rs 5,000 crore capital raise in FY27.
Founder and MD & CEO Sanjay Agarwal owns about 23% of the bank, which Jefferies said underscores strong promoter commitment. Agarwal’s term ends in April 2026, and analysts expect at least one extension.
“AU’s leading growth, improving profitability, and benefits from transitioning to a universal bank justify its premium valuation of 2.7x one-year forward adjusted book and 19x forward earnings,” Jefferies wrote. It cautioned that a prolonged asset quality cycle or weaker economic growth could pose risks.Universal banking (UB) licenses are rare, with the RBI granting only five in the past three decades prior to AU Small Finance Bank’s (AU) in-principle approval in Aug-25. This marks a significant milestone for AU, which began as a vehicle financier nearly 30 years ago, and reflects the regulator’s confidence in the bank’s governance and execution track record.AU plans to convert to a universal bank in 2H CY26, once the sole pre-condition—transferring the promoter’s 23% stake to a NOHFC structure within 18 months of in-principle approval—is completed. The NOHFC framework isolates banking operations from other subsidiaries while allowing promoters to pursue non-banking ventures. Promoter and MD/CEO Sanjay Agarwal is committed to meeting this requirement, though the timeline will also depend on clarity regarding tax exemptions on the stake transfer, Jefferies’ note dated October 13 said.
At about 12:04 pm, shares of the company were trading at Rs 765, up 0.2% from the last close on the NSE. AU Small Finance Bank shares have risen 35% since the beginning of the year.
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